Jhakaria Fabrics wants to expand and they want to expand big. The company’s story revolves around their aspirations to expand their production capacity in a big way.

COMPANY'S BUSINESS OPERATIONS

Today, they are mostly involved in the manufacture and processing of fabrics suitable for making shirts (shirting). Most of their revenue comes from providing this service to other textile manufacturers. Their operations include:

1) They procure ‘Grey Fabric’ from their customers

2) They process the fabric, dye it and then ship it to their clients

WHAT'S THE PROBLEM?

Apart from the obvious problems plaguing the textile industry i.e., declining margins, the company hasn’t been doing all that well when it comes to performance. Their top line has largely remained static and profit margins have been underwhelming. But the promoters believe that a turnaround is long overdue and that with their new production facility they could achieve just that.

The company plans to set up an additional fabric processing unit in M/s. Jakharia Industries with a proposed capacity of 360 lakh meters p.a. To give you some idea about scale, their current production capacity stands at about 760 lakh meters p.a.

However, the new production facility will be set up under a partnership firm where Jhakaria Fabrics will be entitled to 85% of the profits. We don’t quite know why this new production facility has been set up under a partnership firm and we would not want to speculate on this matter further. Instead we want to bring to your attention the problems that have plagued the new facility.

PROBLEMS WITH THE NEW FACILITY

This project was initially scheduled to be implemented with a lower capacity; However, due to delay in obtaining pollution control clearance, the project remained un-implemented. Thereon, after obtaining such clearances, the management, based on their market demand analysis re-worked the size of the project and the same is now scheduled to be completed by April 2019

The whole facility is expected to cost the company around 77 Crores. It has already deployed around 20 Crores through Internal Accruals, Promoter loans and Pre IPO owned funds. The rest, is expected to come from bank borrowings and IPO proceeds.

MEANS OF FINANCE

It’s a considerably capital intensive process and the company’s future will largely depend on the new production facility's success. Currently the company has very little going for it. Infact, the company has gone above and beyond the call of duty to hold on to their margins. Here is one such example

INTEREST WAVIER BY THE PROMOTER

The promoters’ loan to the company stood at around 11 crores. Until April 1, 2017, the promoter charged the company an annual interest of about 12%, but considering that the company is now trying to raise money from an IPO, in a bid to shore up margins, the promoter waived off the interest on the loan. If the promoter would have charged the usual interest rate @ 12%, then profits would have decreased by at least 1.2 Crore for March 31, 2018 (annualized estimates).

DECLINING MANAGERIAL REMUNERATIONS

Also, Managerial renumerations have been on a steady decline, perhaps pointing to the same obvious theme of shoring up margins.

All in all the company hasn’t been able to improve it's top/bottom line in the recent past and until the production facility can kick off its operations, this scenario is unlikely to change and as such the only question we can then ask is if the stock is priced fairly.

ISSUE PRICE

Post issue, on an annualised basis we are looking at a PE of about 29. Based on the company’s current performance and the industry average we must admit that the issue is fully priced. If it was our money we would think twice before taking this gamble.

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